The Deutsche Boat lifts ASX targets higher than peers

The Deutsche Boat’s Tim Baker is pushing out the boat about as far as I’ve ever seen it go. Clearly not content with having simply a December 2014 forecast, the equity strategist has gone “get this up ya, here’s June 2015".

The S&P/ASX 200 will be at 6200 points by that time, he says. Do we like them apples?

Well, I’m not sure if apples are the appropriate choice of fruit. This all seems more like a strategist putting their plums right out there. Eww.

Even more ballsy – or cheaty – is that Tim has decided to adjust his December 2013 S&P/ASX 200 target, to 5500 from (last we saw in September) 5050. That now gives him the highest end of the 2013 forecasts of the 11 equity strategists we keep track of, and brings the average to 5261.1.

However, in our Definitive Targets Post, we wrote in early October: “Now, we might say that having a forecast in September of where the market is going to finish in three months’ time is not particularly gutsy. Especially if you’ve been tweaking and tweaking through the year: it would be like barracking for a sporting team five minutes before they’re about to win.

“That was the point of having the ‘Tangelo’ search term, because it would allow you, dear reader, to follow the upgrades as and when they came.

“Like, if anyone were to upgrade 2013 forecasts now, I think we’d all be a bit disappointed in them."

So, Tim, the investment community is officially disappointed in you. But how to net this off – big plums for 2015 versus tiny little raisins for 2013? Well, I suppose this would be philosophically in line with Tim’s thesis that the market might look expensive on near-term earnings, but not too bad on FY15 and FY1 numbers.

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Tim’s new ASX targets – 5500 by December 2013, 5800 by June 2014, 6000 by December 2014 and 6200 by June 2015 – are higher, across the board, than anything that has thus far been produced by his peers, so the average levels have all been lifted.

These are the first targets The Boat has offered beyond the end of this year. And in any case, June 2015 is so far away, there’s plenty of time for upgrading . . . or downgrading.

Aside from the target tinkering, Tim points out Australia’s price earnings ratio is quite high relative to global peers (in both absolute and historical terms). But it should remain supported because: “(1) The cyclical parts of the market have arguably been under-earning (reflected in their share of market cap around a decade low of 37 per cent, versus the average of 44 per cent), and investors might look forward to normalisation. (2) Fund flows are likely to stay supportive. “Both super funds & households are underweight equities, and super funds are receiving robust inflows ($120bn annually, 50 per cent of which is discretionary) which need a home."

Given this is a bit of a year-forward outlook piece, Tim has drawn together some of the themes he’s riffed on of late. For instance, noting that traditional PE ratios are quite high - the one-year forward and trailing estimates are 7 per cent and 18 per cent above their long-term averages, respectively – but alternate measures still look okay. These would be things like a cyclically adjusted PE (5 per cent below the 50-year average), and that other one about the next year of earnings actually delivered.

That actually delivered earnings PE ratio has averaged 15.3 times, but if forecast earnings are broadly achievable (and The Boat thinks they are), then the current 12 month-forward PE of 14.5 times is a touch cheap. However, “the key message from the four PEs: the market is 4 per cent expensive", Tim says.

Equities look like good value compared to bonds, even if bond yields rise from here. Equity yields look like very good value compared to nominal bond yields, but it should be noted they look a little less compelling compared to real bond yields. In this instance, The Boat has given a bit more weighting to the yield gap between equities and real bonds.

“All up, equities look ~18 per cent cheap vs bond yields, and 4 per cent expensive on PE ratios. Taking the average suggests the market should be 7 per cent higher, which corresponds to our target valuation of ~15½ on 12 month forward earnings."